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Commodities Rally

Where is the Bull Going?

Written by Brian Hicks
Posted August 15, 2013

Commodities are rallying. There are more investors buying than selling. This growth in demand has made many investors optimistic about the future of the market.

commoditiesAnd if you grab the bull by the horns, you could be on track for returns in your portfolio.

Demand Increases and Supplies Decline

Crude oil for September delivery was up to $107.11 on Tuesday, a $1 rise from the day before. Heating oil gained 2.9 cents, wholesale gasoline was up 2.4 cents, and natural gas increased 2.2 cents to $3.332, as Fox News reported.

On Thursday afternoon, oil had risen further to $107.30.

While the United States is showing signs of economic recovery, the political concerns in Egypt may affect oil shipments from the Middle East, a big catalyst behind oil's recent rise.

Gold responded by hitting $1,364 an ounce, a result of a dip in equities and unrest in Egypt.

As far as other commodities go, cocoa is the best one right now. The weather is dry this year, which has delayed crops, and supply isn’t up to par with the demand. The Ivory Coast is the biggest producer of cocoa, and it’s been dealing with a 1.2 percent decrease in output because of the dry conditions, sending cocoa into a bull market. Prices are expected to increase 5.3 percent to $2,718 a ton.

Cotton is another commodity that isn’t meeting demand, most likely due to the same troubles cocoa is experiencing with dry weather. And even corn is on the rise. It went up 1.79 percent. Wheat saw a small increase of 1.79 percent, and coffee has gone up 1.7 percent.

As the prices of commodities surge, many investors wonder what they should do with the situation. Should they hop on them before they become too high, or should they let it pass?

Investing in the Bull Market

Michael Kahn, a writer for Barrons, believes the bull market is coming to an end:

The trend is still up, but there are many warnings now suggesting that investors should prepare for the eventual end of the rally.

Kahn suggests the best thing to do now is sell stocks that aren’t performing. This comes from his analysis of the Standard & Poor’s 500. The index has seen many highs, but many stocks are beginning to fall. Momentum on the Dow Jones Industrial Average has also declined. The relative strength of these indexes had lower peaks in August compared to May. These might be the indicators of a bull market end.

If you jump on the bull right, you run the risk of losing a lot of money should the bull run end. Think about it: we're in a bull market for many of these things because supply is low and demand is high. If the situation in Egypt or the Ivory Coast changes, there may be an increase in supply, which would better meet the demand for oil or cocoa, lowering prices back down.

Tracking the news for these two regions will help you decide what to do about this situation. In the coming days, if the situations are looking better, you may want to invest in oil ETFs. These exchange traded funds allow you to invest in oil without actually buying the commodity itself.

You can choose between a fund that tracks company stocks and one that tracks futures. Many investors choose USO, the United States Oil ETF, and with the rise in oil prices, many have seen a return.

As for cocoa, you can invest in a futures contract from the New York Board of Trade (NYBOT). A futures contract means you agree to buy or sell a commodity (in this case, cocoa) for a pre-determined price at some point in the future. With the rise in cocoa prices, you may be able to buy it now and sell it for more later on.

The good times may not be over yet, so if you so choose, grab the bull by the horns and hang on. You can also wait to see what happens – if bearish analysts like Kahn are right. Keep your eyes open if the bull jumps, turns, or comes to a screeching halt.

 

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